Frey, Rüdiger. 1998. Perfect Option Hedging for a Large Trader. Finance and Stochastics, 2, (2), 115-141.
BibTeX
Abstract
Standard derivative pricing theory is based on the assumption of agents acting as price takers on the market for the underlying asset. We relax this hypothesis and study if and how a large agent whose trades move prices can replicate the payoff of a derivative security. Our analysis extends prior work of Jarrow to economies with continuous security trading. We characterize the solution to the hedge problem in terms of a nonlinear partial differential equation and provide results on existence and uniqueness of this equation. Simulations are used to compare the hedging strategies in our model to standard Black-Scholes strategies.
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Status of publication | Published |
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Affiliation | WU |
Type of publication | Journal article |
Journal | Finance and Stochastics |
Citation Index | SSCI |
WU Journalrating 2009 | A |
WU-Journal-Rating new | FIN-A, STRAT-B, VW-B, WH-B |
Language | English |
Title | Perfect Option Hedging for a Large Trader |
Volume | 2 |
Number | 2 |
Year | 1998 |
Page from | 115 |
Page to | 141 |
URL | http://www.math.ethz.ch/~finasto/ |
DOI | http://dx.doi.org/10.1007/s007800050035 |
Open Access | N |